XIV Portfolio Compression XV Glossary of Amendments to the Regulations 58

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1 THE CLEARING CORPORATION OF INDIA LTD. REGULATIONS Rupee Derivatives Segment and Rupee Derivatives (Guaranteed Settlement) Segment CHAPTERS CHAPTER NO. CHAPTER NAME PAGE NO. Definitions 2-4 I Introduction 5 II Membership 6-11 III Settlement Guarantee Fund IV Processing of Rupee Derivative Trades V Settlement of Cash flows of Trades VI Margins VII Defaults VIII Risk Management IX Default Fund X Notices 51 XI Fees and Charges XII Sudden Event Handling 54 XIII Reports 55 XIV Portfolio Compression XV Glossary of Amendments to the Regulations 58 Updated in November 2015

2 DEFINITIONS The following terms used in these Regulations shall have the meanings therein specified for the purpose of these Regulations. Cash flow date: Cash flow date is the date on which payment obligations of members are due for settlement. Close-out is a process of determining payment obligations before the date of settlement of concerned trades as per the process set out in Chapter VII Defaults. Effective Date: Effective date is the date on which the parties to the Rupee Derivative contract begin calculating accrued obligations, such as fixed and floating interest payment obligations. The Effective Date shall be the first Mumbai Business Day (excluding Saturday) after the Trade Date for all the benchmarks except for the INR-MIFOR benchmark for which the Effective Date shall be the second Mumbai Business Day (excluding Saturday) after the Trade Date. Exposure Check shall have meaning ascribed to such term in Regulation G1 of the Chapter IV. Forward Rate Agreement: A forward Rate Agreement is a financial contract between two parties to exchange interest payments for a notional principal amount on settlement date, for a specified period from start date to maturity date. Accordingly, on the settlement date, cash payments based on contract (fixed) and the settlement rate, are made by the parties to one another. The settlement rate is the agreed benchmark/reference rate prevailing on the settlement date. FIMMDA The Fixed Income Money Market and Derivatives Association of India. INBMK Reuters Indian Benchmark Rate An Interest Rate Swap is a financial contract between two parties exchanging or swapping a stream of interest payments for a notional principal amount on multiple occasions during a specified period. Such contracts generally involve exchange of fixed to floating or floating to floating rates of interest. Accordingly, on each payment date-that occurs during the swap periodcash payments based on fixed/floating and floating rates, are made by the parties to one another. 2

3 MIBOR Mumbai Inter Bank Offer Rate MIFOR Mumbai Inter Bank Forward Offer Rate MIOIS Mumbai Inter-Bank overnight indexed Swap MITOR Mumbai Interbank Tom Offer Rate MIOCS Mumbai Inter-Bank Offered Currency Swaps: Notional Principal: Notional principal or notional amount, of a rupee derivative contract is a hypothetical underlying quantity upon which interest rate or other payment obligations are computed. Replenishment Level shall have meaning ascribed to such term in Regulation A2 of Chapter VI. Reset Date: The reset date is the date on which floating interest rate for the next payment period is decided and fixed. Reset date is one Mumbai business day (excluding Saturday) before the cash flow date for all the benchmark trades except for MIFOR benchmark trades for which the reset date is two business days before the cash flow date. Reversal i.e. Early Termination Date: Reversal i.e. Early termination date is any date before the actual maturity date of the Rupee Derivative contract on which both the counterparties agree to terminate the relevant Rupee Derivative contract. Rupee Derivatives Dealing System: Rupee Derivatives Dealing System means the electronic system made available by Clearcorp to the members in respect of Rupee Derivative Transactions in terms of the provisions of its Bye-laws, Rules and Regulations of Clearcorp. Substitution of Trade: Substitution of Trade means substitution of set of trades with fewer number of new trades to achieve compression of trade portfolios of the clearing participants or in relation to default handling. 3

4 Termination Date: Termination date is the date on which the Rupee Derivative contract matures. Tenor: The tenor indicates the life span of the Rupee Derivative contract. Trade Date: Trade Date is the date on which the parties enter into or agree to the terms of the Rupee Derivative contract. 4

5 CHAPTER I : INTRODUCTION The Regulations shall be known as The Clearing Corporation of India Ltd (Rupee Derivatives Segment) Regulations 2010 and as amended in 2014 APPLICABILITY These Regulations shall be applicable to all Members admitted to the Rupee Derivatives Segment and the Rupee Derivatives (Guaranteed Settlement) Segment of The Clearing Corporation of India Ltd. The Rupee Derivatives Segment consists of Trade Processing Services and Non-Guaranteed Settlement Services. 5

6 CHAPTER II : MEMBERSHIP A) APPLICATION FOR MEMBERSHIP 1. Entities permitted by Reserve Bank of India to enter into Rupee Derivatives Trades and satisfy the relevant membership eligibility criteria of Clearing Corporation shall be eligible to seek membership to Rupee Derivatives Segment of Clearing Corporation; 2. Entities which are Members of Rupee Derivatives Segment of Clearing Corporation and also Members of Securities Settlement Segment of Clearing Corporation shall be eligible to seek membership of Rupee Derivatives (Guaranteed Settlement) Segment of Clearing Corporation; 3. Eligible entities desirous of availing the facility of Central Counterparty Clearing of their trades in Rupee Derivatives shall submit an application in the prescribed format to Clearing Corporation complete in all respects together with all requisite enclosures as required to be submitted in terms of the Application Form; 4. Notwithstanding anything contained in Sub-Regulation A(2) & A(3) above, entities eligible as per Sub-Regulation A(1) above, shall also be eligible to avail the facility of Non-Guaranteed Settlement provided by Clearing Corporation to the members of Rupee Derivatives Segment. B) PROCESSING OF APPLICATIONS 1. Every such application received, in terms of sub-regulation A above, shall be submitted to the Approving Authority for consideration; 2. Clarifications and/or additional information sought by the Approving Authority shall be conveyed to the applicant. Such applications shall be processed only upon receipt of complete particulars called for by the Approving Authority; 3. Mere submission of completed application forms and/or additional information sought by the Approving Authority does not confer by itself automatic right for any applicant to claim grant of Membership to Clearing Corporation; 6

7 4. Upon receipt of approval of the Approving Authority, Clearing Corporation shall communicate such approval to the applicant with a request to complete the other formalities outlined in these Regulations; 5. Every applicant, upon receipt of approval of Membership, intending to avail the services of Non- Guaranteed and Guaranteed Settlement through Clearing Corporation shall execute a set of documents in such form and manner as may be prescribed by Clearing Corporation. Such execution shall be carried out by duly authorized signatory (ies) after having obtained the necessary internal approvals for the purpose. 6. By submitting the application, the applicant shall be deemed to have given consent to Clearing Corporation for disclosure of all or any information relating to derivative transactions that are concluded by the applicant with counterparties which are branches of banks in other jurisdictions, to any Swap or Trade data Repository or Regulators, in India or other jurisdictions, to whom disclosures are required to be made to the extent required or permitted by applicable laws. C) MEMBERSHIP ID 1. Every applicant admitted as a Member of Clearing Corporation shall be allotted Membership ID or shall use the existing Membership Id as directed by Clearing Corporation; 2. Every Member shall incorporate the Membership ID in all trades reported to Clearing Corporation for Clearing and Settlement; 3. Every Member shall incorporate the Membership ID in all its communications to Clearing Corporation; 4. Non-incorporation of Membership ID by a Member in any trade or communication shall absolve Clearing Corporation of all liabilities or consequences of inaction by Clearing Corporation; 5. Every Member shall ensure that incorporation and/or use of its Membership ID is restricted to its authorized personnel only; 6. Clearing Corporation and/or any of its officials shall not in any way be liable for any loss or consequences that may arise on account of unauthorized and/or wrongful use of Membership ID. 7

8 D) CLEARING MEMBER: A Member may be admitted as a Clearing Member for Clearing and Settlement of the trades in this segment. Such Member would be entitled to clear and settle Rupee Derivatives trades of its constituents in terms of the policies and procedures to be notified by Clearing Corporation effective from a date notified by Clearing Corporation. E) RESIGNATION FROM MEMBERSHIP: 1. A Member who: i) is not a Defaulter; ii) has met all margin calls; and iii) has replenished its Default Fund contribution in respect of calls made on or before the Resignation Request Date (as defined in Clause E2 below); shall have the right to resign from Rupee Derivatives (Guaranteed Settlement) if it satisfies either of the following conditions: a) If a Member has no outstanding trade as accepted by Clearing Corporation (hereinafter referred to as Outstanding Trades ) for two previous months; or b) If the Member has taken a loss through replenishment of its contribution to the Rupee Derivatives Guaranteed Settlement Default Fund and the specified loss threshold as notified by Clearing Corporation from time to time in this respect has been reached. 2. A Member resigning under E1 (a) shall have to give prior notice in writing to the Clearing Corporation clearly indicating its decision to resign from the Rupee Derivatives Guaranteed Settlement Segment. The notice shall be effective on the Resignation Request Date, which for the purpose of this segment shall be the date on which such written notice is received by Clearing Corporation when delivered by such Member in person or by courier, or by a registered mail (with a return receipt requested). Clearing Corporation shall promptly notify other Members of this segment about the resignation request received. Such request for resignation under E1 (a)shall be approved or rejected by the Managing Director of Clearing Corporation or by an official so authorized by the Managing Director within 2 8

9 business days from the Resignation Request Date, based on the fulfillment or otherwise of the conditions for resignation by the member. The resignation shall come into effect from such date of approval by the Managing Director of Clearing Corporation or by an official so authorized by the Managing Director or in the absence of such approval or rejection, it shall be deemed to be approved at the end of 2 business days from the Resignation Request Date. The resigning Member shall be entitled to also receive any amount lying as its contribution to the Default Fund Account for this segment after adjusting all dues owed by it to Clearing Corporation in terms of its Bye -laws, Rules & Regulations. 3. A Member desiring to resign under clause E1 (b) above shall have to give prior notice of 30 calendar days to the Clearing Corporation in writing clearly indicating its decision to resign from the Rupee Derivatives (Guaranteed Settlement)Segment. Clearing Corporation shall promptly notify other Members of this segment about the resignation request received. The resigning Member shall then be required to close-out all its Outstanding Trades as of Resignation Request Date within such notice period. The process of close-out for such trades shall be as notified from time to time by Clea ring Corporation. If the Member has not been able to close-out all its Outstanding Trades within such notice period, the Member shall have the following options: a) it can seek extension of time by another 30 calendar days from Clearing Corporation and close-out its remaining Outstanding Trades within the extended period. However, if in the opinion of Clearing Corporation, such extension may be used by the Member to disrupt the settlement system, it shall be entitled to refuse any such extension. b) when at least 90% of its Outstanding Trades in value terms are closed-out, within the first 30 days or the extended period as the case may be, the member may request Clearing Corporation to close-out the remaining Outstanding Trades. Clearing Corporation shall close-out these remaining Outstanding Trades with the original bilateral counterparties of the resigning member after notifying the counterparties at least one business day in advance. Such close-out shall be 9

10 effected at a price to be notified in this behalf by Clearing Corporation from time to time. c) Bilateral counterparties with whom trades are closed-out in terms of sub-clause (b) may enter into new trades so to cover the open position resulting from such close-out in the market and report the same to Clearing Corporation. Such intimation shall be sent to Clearing Corporation in the prescribed format on the next business day after the close-out. The loss if any incurred by the bilateral counterparties shall be borne by the exiting Members, who shall within [one hour] of notice to them (exiting Member) by Clearing Corporation or within such extended time period as the Clearing Corporation may in its discretion upon request from the exiting Member agree, deposit the amount in cash with Clearing Corporation which shall then be passed to the bilateral counterparty which incurred the loss. Provided, however that if such claim is raised by Clearing Corporation in the last business hour of the day, the exiting Member shall be liable to pay during the first hour of the next business day. In case of any nonpayment of the amount, the exiting Member will be declared as a defaulter and shall lose the option to exit. d) Provided that the rate at which the bilateral counterparty has entered into any of the trades mentioned in (c) above is identified as the outlier by Clearing Corporation, the exiting Member shall not be liable for the loss. The decision of Clearing Corporation in regard to admissibility of loss in these circumstances shall be final and irrevocable. 4. All requests for resignation under clause E1 (b) shall be approved or rejected by the Managing Director of Clearing Corporation or by an official so authorised by the Managing Director, based on the fulfillment or otherwise of the conditions for resignation by the member after the Member has closed-out all its Outstanding Trades within the specified 30 days notice period or within the extended period and upon the fulfillment of all the requirements under clause E(3). If it is not rejected or if such approval is not given by the end of the day of the Member s closing out of all its outstanding trades (including the closing out in terms of sub-clause E(3)(b)), it shall be deemed approved at the end of such day. Such resignation shall however come into effect from the end of the day upon the acceptance by Clearing Corporation of the trades generated out of the close-out process. The resigning Member shall thereupon be entitled to 10

11 receive any amount lying to the credit of its Default Fund account for this segment after adjusting for other dues to Clearing Corporation. 5. If the Member fails to close-out all its Outstanding Trades in accordance with clause E(3) above, the resignation notice shall automatically become null a nd void. 6. The procedure as specified in Chapter IV- Rule 7-Resignation of CCIL Rules, shall not apply to the Member resigning as per the clause E of this Chapter. 11

12 CHAPTER III : Settlement Guarantee Fund The provisions of this chapter shall be applicable only to Members of Rupee Derivatives (Guaranteed Settlement) Segment. A. PURPOSE 1. Clearing Corporation shall be entitled to call for and maintain a Settlement Guarantee Fund (hereinafter referred to as SGF ) in respect of its Rupee Derivatives (Guaranteed Settlement) Segment as a part of its risk management process to cover risks arising out of any default by Members; 2. Clearing Corporation may, however, consider the unutilized portion of Securities Segment SGF towards margins for Rupee Derivatives (Guaranteed Settlement) Segment. In such an event, a Member shall be deemed to have authorized the Clearing Corporation to utilize the unutilized portion of Securities Segment SGF towards margins for Rupee Derivatives (Guaranteed Settlement) Segment. Such margins for the Rupee Derivatives (Guaranteed Settlement) shall be blocked out of the unencumbered SGF available as per procedure notified from time to time. 3. Such SGF shall be utilized for such purpose as provided in the Bye-Laws, Rules and Regulations of Clearing Corporation including towards meeting default obligations/deficiencies and/or any other dues arising out of Clearing and Settlement operations undertaken by Clearing Corporation as part of its day to day operations. B. COMPOSITION 1. Contributions by Members to the SGF shall be in the form of cash and/or eligible Government securities or in any other form as may be specified by Clearing Corporation from time to time ; 2. Every Member shall contribute a minimum specified amount as Initial Margin and such other margin as prescribed from time to time by Clearing Corporation to trade on Rupee Derivatives Dealing System. 3. Clearing Corporation may require every Member to contribute the minimum specified margins in the form of cash and balance in the form of eligible securities. The proportion of the cash to eligible securities to be maintained by a Member shall be notified by Clearing Corporation from time to time. Clearing 12

13 Corporation may, however, permit its Members to deposit their entire contributions to SGF in the form of cash. 4. The proportion of Cash to Securities to be maintained by the Member may be changed after due notification by Clearing Corporation from time to time; 5. The unutilized portion of Securities Segment SGF utilized towards margin obligation of Rupee Derivatives (Guaranteed Settlement) Segment, in terms of sub-regulation A2, above shall cover obligation towards Initial Margin, Mark to Market Margin and/or any other margin that may be prescribed as per the Risk Management Process for Rupee Derivatives (Guaranteed Settlement) Segment; 6. A Member shall at all times ensure that its contribution to Securities Segment SGF are adequate to cover risk exposure on its outstanding Rupee Derivative trades accepted by Clearing Corporation on behalf of the Member as specified in Chapter VIII relating to Risk Management in these Regulations; C.ELIGIBLE SECURITIES 1. Clearing Corporation shall specify the list of eligible securities which shall qualify for contribution to SGF. The list of securities eligible for such contribution shall be notified by Clearing Corporation from time to time. Securities declared as ineligible for Securities Segment SGF contribution shall not be reckoned for margin of such Member towards Rupee Derivatives Segment from the effective date of such ineligibility; 2. Clearing Corporation may, through notification from time to time, specify the type of security(s) including the maximum contribution to be made available in the form of a single security or group of securities that a Member may contribute to SGF towards margin requirements. D.CONTRIBUTION TO SGF 1. A Member shall be required to contribute to SGF before Clearing Corporation accepts Trades from the Member for Clearing and Settlement; 13

14 2. The SGF contribution of a Member shall cover its margin obligations towards initial margin, MTM margin and/or any other margin that may be prescribed in Chapter VIII relating to Risk Management in these Regulations; 3. The provisions governing the administration of the SGF, including receipt and withdrawal of securities and cash contributions, investment of the fund and corporate actions thereon shall be governed by the Regulations of Clearing Corporation, relating to the Securities Settlement segment, except to the extent specified herein. E. INTEREST ON CASH MARGIN: 1. A Member shall be entitled to receive interest at quarterly rests (at the end of every calendar quarter) on daily end of day utilization of cash margins during the relative period maintained by it in excess of the minimum prescribed cash margin as notified by Clearing Corporation from time to time. 2. Interest on utilization of cash margin shall be paid at a rate not exceeding 100 basis points lower than the weighted average of 91 days Treasury Bills cut -off yields at the last three auctions held before the relevant interest payment date. The benchmark instrument to which such cash compensation would be pegged as well as spread between the yield on the benchmark instrument and the interest rate paid by Clearing Corporation may be changed from time to time after due notification to the Members. 14

15 CHAPTER IV : PROCESSING OF RUPEE DERIVATIVE TRADES The provisions of this chapter are applicable for processing services for trades reported by all Members of the Rupee Derivatives Segment including Members opting for guaranteed settlement of Clearing Corporation, unless stated otherwise. A.ELIGIBLE TRADES a) Clearing Corporation shall accept the following Rupee Derivatives Trades: i) Interest Rate Swap ii) Forward Rate Agreement b) Clearing Corporation may, from time to time, notify the type of trade eligible to be included under its Rupee Derivatives Segment; c) Clearing Corporation may, from time to time, notify the type of trades including the benchmarks eligible to be included under its Rupee Derivatives (Guaranteed Settlement) Segment; d) All trades as notified in Rupee Derivatives Instruments concluded between the Members of Rupee Derivatives Segment that have the status as matched shall be accepted for processing; e) Clearing Corporation shall, from time to time, notify the features like Minimum Notional Principal Amount, Tenor, Effective Date, Reset dates, Floating Benchmark Rates etc for each type of Rupee Derivatives trade. B.ACCEPTANCE OF TRADES: 1. Clearing Corporation shall receive details of Trades reported by Members of Rupee Derivatives Segment in a prescribed format over RBI s INFINET or any other form as deemed fit and notified by Clearing Corporation. Clearing Corporation shall accept such Trades reported by the Members for processing; 2. The trades matched as per sub clause B(1) above shall hereinafter be called Trade For Processing (TFPR).Status of "TFPR" refers to trades that are not eligible for Guarantee by Clearing Corporation. The Trades with status "TFPR" shall however be eligible for settlement through Clearing Corporation on a non-guaranteed basis if both the counterparties have availed the facility of non-guaranteed settlement. 15

16 3. Clearing Corporation shall receive details of trades reported by Members of Rupee Derivatives (Guaranteed Settlement) Segment in a prescribed format over RBI s INFINET or any other form as deemed fit and notified by Clearing Corporation. Clearing Corporation shall accept eligible trades reported by the Members of Rupee Derivatives (Guaranteed Settlement) Segment for Clearing and Settlement; 4. Clearing Corporation shall directly receive trades concluded on the Rupee Derivatives Dealing system in the Rupee Derivatives (Guaranteed Settlement). Trades received from the Rupee Derivatives Dealing System shall be eligible for clearing and settlement by Clearing Corporation from the point of acceptance of the trade by Clearing Corporation; 5. Clearing Corporation shall subject all those trades accepted as per sub regulation B (3) and B (4) above to Exposure Check on an online basis in order to verify that margin available to the credit of the Members are adequate to provide risk cover for guaranteed settlement for such matched trades as per Chapter VIII on Risk Management. C.TIMINGS 1. Members shall be governed by the prevalent RBI notification for reporting of deals / trades. However, for reporting of amendments, cancellations and reversals of deals / trades and for various other activities incidental to the processing, a separate time schedule will be notified by Clearing Corporation from time to time. 2. Clearing Corporation may modify time schedules for the various activities prescribed in sub-regulation C (1) above, and notify the Members of such changes at least seven business days before such changes shall take effect; Provided however that Clearing Corporation may, if it is of the opinion that it is in interest of the market, reduce the notice period. 3. The Member shall adhere to the time schedules prescribed as above. Clearing Corporation shall not be bound to accept deals received after the cut-off times prescribed and shall not be responsible for any consequences arising as a result of non-acceptance of such deals. 16

17 D.NEW TRADES: VALIDATION AND MATCHING OF REPORTED DEALS 1.The deals reported by Members shall be validated to ensure that: (i) Both the counterparties to the trade are Members of Rupee Derivatives Segment; (ii) No information as required in the format prescribed is omitted; (iii) The dates reported are valid business days as notified by Clearing Corporation. These validations shall be applicable for both trades reported only for processing and to trades reported for settlement on a guaranteed and nonguaranteed basis. 2. Clearing Corporation shall, after successful validation of deals received from both the Members, match the deals to form a trade and generate a unique Trade ID for each such trade; 3. Clearing Corporation shall reject those deals which do not satisfy validation checks under advice to Members; E.REJECTION OF REPORTED DEALS Clearing Corporation shall be entitled to reject the deals reported to it by Members for any valid reason such as: a. Inaccurate information such as incorrect Membership ID, invalid dates etc.; b. If deal is reported beyond cut-off time as notified by Clearing Corporation; c. When an amendment, cancellation or reversal (i.e. early termination) is reported for an already rejected trade. d. Any other reason as deemed fit by Clearing Corporation under advice to the Member. F. AMENDMENT / REVERSAL (i.e. EARLY TERMINATION) / CANCELLATION OF TRADES 1. Amendment/reversal (i.e. early termination)/cancellation instruction, if any, reported by the Members, after the original Trade has been matched shall be acted upon only if the amendment/reversal (i.e. early termination)/cancellation 17

18 instruction is received from both the counterparties to the trade within the time limit prescribed for the purpose of reporting such instructions, failing which Clearing Corporation shall proceed with the original matched Trade ; 2. For Members of Rupee Derivatives (Guaranteed Settlement) Segment, Clearing Corporation shall subject to Exposure Check any amendment/reversal (i.e. early termination)/cancellation to trades already accepted for settlement in order to verify that the margin available to the credit of both the counter-party Members are adequate to meet the margin requirement on the resultant position. For reversals (i.e. early terminations), the cash flows due on such early terminations will also be taken into consideration for assessing margin ade quacy on the resultant position; 3. Amendments/Cancellations/Reversals (i.e. early terminations)if any, reported by the Members of Rupee Derivatives (Guaranteed Settlement) Segment in respect of trades accepted for settlement, shall be acted upon only if the resultant position also passes Exposure Check, failing which Clearing Corporation shall proceed with the original matched Trade. G. EXPOSURE CONTROL AND ACCEPTANCE OF TRADES IN RUPEE DERIVATIVES (GUARANTEED SETTLEMENT) SEGMENT 1. Clearing Corporation shall subject all eligible matched trades to verification of adequacy of margins for both Members to a trade on a trade by trade basis. This process is termed as Exposure Check. Trades which pass through Exposure Check shall be accepted for guaranteed settlement by the Clearing Corporation. 2. Trades which fail to pass through Exposure Check shall remain in queue as Pending Exposure. Exposure validation for such trades shall continue to be performed on an ongoing FIFO basis until a notified number of days before the Cash Flow Date. If a trade fails to pass Exposure Check even at that stage, such a trade shall be classified as Trade For Processing (TFPR); 3. Unless stated otherwise, TFPR trades shall also consist of the following: a) Trades (including amended trades) which do not pass through Exposure Check and remain as pending exposure for a notified number of days after matching; b) Trades which remain as pending exposure until a certain number of days before the Cash Flow Date as notified by Clearing Corporation; 18

19 c) Either counterparty to a trade has not opted for guaranteed settlement of Clearing Corporation; d) Any other reason as notified by Clearing Corporation from time to time. 4. The Exposure Check of the trades received from Rupee Derivatives Dealing System shall be carried out on an online basis. 5. If the margin amount contributed towards the Rupee Derivatives Dealing System is inadequate, the SGF value made available by the Member, if any, shall be blocked towards the balance margin requirement. 6. The Exposure Check for the reported trades shall also be carried out on an online basis. 7. Void Trades a. The trades concluded on the Rupee Derivatives Dealing System are guaranteed by Clearing Corporation in accordance with the bye-laws, rules and regulations of Clearing Corporation. The trades concluded on Rupee Derivatives Dealing System shall not be treated as cancelled and void under normal circumstances; b. Clearcorp, however, under exceptional situations, shall have the right to cancel the trades in case of any system failures at Clearing Corporation or Clearcorp leading to failure of trade acceptance process or where such action is necessary to protect the integrity of the market; c. Notwithstanding any other provisions, the Clearing Corporation shall be entitled to treat any trade as void if it believes that th e trades are executed at the prices that could adversely affect market integrity or if any trade is cancelled by ClearCorp; d. Trades treated as void in such events set out in clause (a), (b) and (c) above shall be void ab initio. No liability whatsoever shall accrue to Clearcorp / Clearing Corporation and/or any of its officials for not clearing and settling such trades in terms of this provision; e. Clearing Corporation shall be entitled to recover any liability from any Member arising out of treating the trades as void for the purpose of Clearing and Settlement. 19

20 H.HOLIDAY RULES 1. Clearing Corporation shall normally function on all the days, excluding Sundays and those days that are declared as holidays under the Negotiable Instruments Act, 1881 and such other days on which transactions/settlement may not take place as declared by RBI or such other authority; 2. Unless otherwise specified, Saturday shall not be a Business Day for any purpose and regardless of the centre where the deal is transacted, the benchmark and the holiday calendar for the purposes of computation of interest streams shall be as that in Mumbai, except in case of Interest Rate Swap wherein the benchmark is based on the foreign exchange market, for which the holiday calendar of the relevant centre for that currency shall also be applicable; 3. Unless stated otherwise, Clearing Corporation may follow the guidelines issued by the Regulator or such other authority for giving effect to the terms of trade including the Trade Date, effective date, reset date, termination date etc. on such declaration of holidays. 20

21 CHAPTER V: SETTLEMENT OF CASHFLOWS OF TRADES A. SETTLEMENT OF CASH FLOWS UNDER NON-GUARANTEED SETTLEMENT The provisions of Clause A shall be applicable for the following types of trades: a) Both the counterparties to the trade have opted for non -guaranteed settlement; b) One of the counterparties to the trade has opted for non-guaranteed settlement and the other counterparty has opted for both non-guaranteed and guaranteed settlement 1. Clearing Corporation shall notify the changes, if any, to the methodology for computation of settlement obligation of trades as set out below; 2. Cash flows in respect of those trades including payable/receivable amount on reversal (i.e. early terminated) trades which have been matched as TFPR shall be considered for non-guaranteed settlement; 3. While computing settlement obligation for the Members, Clearing Corporation shall, include the consideration amount as reported by the Members for their reversal (i.e. early terminated) trades to be settled and shall not be responsible for any error on the part of the Member in reporting consideration amount for such trades; 4. Cash flows in respect of those trades including payable/receivable amount on reversal (i.e. early terminated) trades which have been rejected in terms of Chapter IV (G) (2) of these Regulations shall be settled on a non - guaranteed basis by Clearing Corporation provided both the Members have opted for non-guaranteed settlement 5. Clearing Corporation shall, at the time of arriving at the settlement obligation of each Member, carry out multi-lateral netting across all applicable trades of the Members; 21

22 6. Clearing Corporation shall, at the end of each day, generate Final Obligation Report for each Member for settlement on next business day. The final obligation shall include: a. the settlement obligation arising out of normal trades of the Member; b. the settlement obligation arising out of reversal (i.e. early termination) of trades as reported by Member/s; 7. The Obligations contained in the Final Obligation Report shall constitute binding and conclusive confirmation of the respective Member s settlement obligation for such settlement date position; 8. Settlement Obligation report generated by Clearing Corporation shall: a. contain details of the net position of the Member for a settlement date and shall include all trades accepted for non -guaranteed settlement for arriving at such position; b. deemed to be a Member s confirmation of the different trades for which funds are to be received from and/or paid to the Member on settlement date; c. be Members instructions to Clearing Corporation for effecting settlement in its RTGS Settlement / Current account at RBI; 9. Clearing Corporation shall, on the day of settlement, generate settlement obligation file which shall be sent to RBI for settlement within the cut -off time as notified by RBI for Rupee Derivatives settlement; 10. Unless otherwise specified, the settlement of funds in respect of Members shall take place through its RTGS Settlement / current account maintained with RBI; 11. Member shall ensure availability of sufficient funds in its RTGS Settlement / current account with RBI; 12. Members may pre fund the settlement obligations as notified by Clearing Corporation from time to time. 22

23 13. Shortfall in the account of a Member to meet its fund obligations arising out of its cashflows for a settlement date shall be considered as funds shortage; 14. Fund shortage as per the Sub-Regulation A (13) shall be handled as under: a) The shortfall amount shall be allocated to the Member(s) who have funds receivable position (hereinafter called Allocatee ) on a bilaterally netted basis from the Member who has committed shortage; b) The allocation shall be in the ratio of net amount receivable from the Member who has committed shortage; c) Such allocation may result in revision of the obligation values for the Allocatees as under: i. Reduction in existing payout (receivable by the Member) value or ii. Increase in existing pay-in (payable by the Member) value or iii. Conversion of existing payout to pay-in value. d) Clearing Corporation shall communicate to all the Allocatees about the revised obligation values; e) Allocatees whose receivable position is converted into payable position or allocatees whose payable position has increased as a result of such allocation, shall be required to fund their account with RBI before a specified time on the settlement date as notified from time to time.; f) The revised settlement file shall be sent to RBI for settlement; g) If all pay-ins (payable by the Members) are successfully processed, the payouts or the receivable obligations of the Members shall be paid out; h) In the event of a shortage being encountered in the revised obligation, Clearing Corporation shall abandon the non-guaranteed settlement for the day and the same shall be communicated to concerned Members; i) Clearing Corporation shall not be responsible for the settlement of trades under non-guaranteed settlement. 23

24 B. SETTLEMENT OF CASH FLOWS UNDER GUARANTEED SETTLEMENT The provisions of this Clause B shall be applicable for the trades that are eligible for guaranteed settlement where both the counterparties to the trade have opted for Guaranteed Settlement. 1. Clearing Corporation shall accept for Clearing and Settlement only those matched trades including reversal trades which pass Exposure Checks as mentioned in Chapter IV (G) of these Regulations; 2. Clearing Corporation shall notify the benchmark rates and the methodology for computation of settlement obligation of trades; 3.While computing settlement obligation for the Members, Clearing Corporation shall, include the consideration amount as reported by the Members for their reversal (i.e. early terminated) trades to be settled and shall not be responsible for any error on the part of the Member in reporting consideration amount for such trades; 3. Funds obligation of a Member shall comprise of the obligation in respect of trades which have passed exposure and have cash flows due for settlement for a given settlement date; 4. Clearing Corporation shall, at the time of arriving at the settlement obligation of each Member, carry out multi-lateral netting across all counterparties of the Member; 5. Clearing Corporation shall, at the end of each day, generate Final Obligation Report for each Member for settlement on next business day. The final obligation shall include: a) the settlement obligation arising out of normal trades of the Member; b) the settlement obligation arising out of reversal (i.e. early termination) of trades as reported by Member/s; 24

25 6. The Obligations contained in the Final Obligation Report shall constitute binding and conclusive confirmation of the respective Member s obligations. The obligations of the respective Members so determined shall be deemed to be final and irrevocable. 7. Settlement Obligation Report generated by Clearing Corporation shall: a. Contain details of the net position of the Member for a settlement date and shall include all trades accepted for Guaranteed Settlement for arriving at such position; b. Be deemed to be a Member s confirmation of the different trades for which funds are to be received from and/or paid to the Member on settlement date; c. Be Members instructions to Clearing Corporation for effecting settlement in its RTGS Settlement / current account at RBI; d. Settlement shall be final and irrevocable when the net obligations are determined. 8. Clearing Corporation shall, on the day of settlement, generate settlement obligation file which shall be sent to RBI for settlement within the cut-off time as notified by RBI for Rupee Derivatives Settlement; 9. Unless otherwise specified, the settlement of funds in respect of Members shall take place through its RTGS Settlement / current account maintained with RBI; 11 Member shall ensure availability of sufficient funds in its RTGS Settlement/ current account with RBI and if a Member fails to provide the same on the settlement date to meet its fund obligations arising out of its deals, it shall be considered as funds shortage which shall be dealt with as provided in Chapter VII relating to Defaults in these Regulations; 12 Clearing Corporation shall, after receipt of settlement confirmation from RBI, release the margins which are blocked as described in Chapter VI (D) of these Regulations for the fund obligation of Members. 25

26 C. TRADES NOT SETTLED BY CLEARING CORPORATION Clearing Corporation shall assume no responsibility for settlement of such trades which are not eligible to be settled on a non guaranteed basis in terms of Clause A above or on a guaranteed basis in terms of Clause B above. 26

27 CHAPTER VI : MARGINS The provisions of this chapter shall be applicable only to Members of Rupee Derivatives (Guaranteed Settlement) Segment. A Margin Requirements 1. Clearing Corporation shall prescribe the requirements of margins for the Rupee Derivative trades to be settled through Clearing Corporation and the Members shall furnish such margins as a condition precedent for acceptance of such trades by Clearing Corporation for guaranteed settlement. 2. Clearing Corporation shall be entitled to make a margin call if the margin obligation of a Member reaches a specified percentage of its SGF value made available as margin for this segment as notified by Clearing Corporation. Such specified percentage shall be termed as Replenishment Level. If a margin call is sent by Clearing Corporation, it shall be the responsibility of the Member to bring additional margin thereafter so that the margin requirements in the account of the Member as a percentage of margin availability for this segment is below the Replenishment Level. 3. Clearing Corporation may however continue to accept trades on account of such Member till the margin obligation reaches a higher percentage, termed as Rejection Level. After the margin obligation for a Member reaches Rejection Level, Clearing Corporation may ordinarily not accept any further trade of the Member till additional margin is deposited so as to bring the margin requirement as a percentage of margin availability for this segment on account of that Member to lower than the Replenishment Level as described above. Clearing Corporation however may accept trades for guaranteed settlement without any further reference to any Member, even after the margin liability for this segment has breached the Rejection level, if such acceptance is necessitated due to post trade Exposure Check of trades concluded on Rupee Derivatives Dealing System. 4. Clearing Corporation shall notify the percentages set as Replenishment Level and Rejection Level. It may also, after duly notifying the Members, alter the percentages set as Replenishment Level or Rejection Level. 27

28 5. Clearing Corporation shall also be entitled to make margin call for possible margin shortfall towards Incremental MTM margin liability as described in clause (B) (2) below. On receipt of notice towards any such margin call, the Member shall arrange to deposit additional amount in its SGF account not later than PM of the next business day (by AM if the next business day is a Saturday), so that the balance in SGF account available as margin is adequate to cover its margin obligation in this segment (i.e. the margin requirement as percentage of margin available for this segment is below the Replenishment Level as described in Clause A(2) above). B MARGIN COMPONENTS The margins to be provided by the Members shall comprise of: 1. Initial Margin i) Initial Margin is the margin obligation required to be fulfilled by a Member as its contribution to SGF in relation to risk exposure on the outstanding Trades of the Members accepted for guaranteed settlement by Clearing Corporation. Such risk exposure shall be arrived at based on Value at Risk for the portfolio of outstanding trades or based on such other method as notified by the Clearing Corporation from time to time. ii) Initial Margin shall also include an additional amount towards Spread Margin in order to effect a partial disallowance of the full offset between various IRS and FRA trades provided through portfolio margining. Spread margin shall be computed as per the process notified by Clearing Corporation from time to time. iii). Clearing Corporation may, however, set a minimum margin requirement as notified by it from time to time. 2. Mark to Market Margin i) Mark to Market margin is that margin contributed towards change in value of its trade portfolio arising out of adverse rate movements and required to be contributed by a Member. Such obligation shall be computed as part of daily marking to market exercise as outlined in Chapter relating to Risk Management in these Regulations, on 28

29 outstanding Trades of the Members accepted for guaranteed settlement by Clearing Corporation. ii) Increase in MTM Margin obligation of a Member for the day over its MTM Margin obligation for the previous day shall be treated as Incremental MTM Margin for such Member. This amount shall be payable by the Member on the next working day before the cut off time as stipulated in sub-clause A (5) above. iii) MTM Margin recovered during the day on old trades or on trades done at off market rates in terms of clause (C) (2.6) of Chapter VIII relating to Risk Management shall however not qualify for incremental MTM Margin. 3. Volatility Margin i) Volatility Margin comprises of the margin obligation imposed by Clearing Corporation due to sudden increase in volatility in swap rates, forward premia or interest rates and required to be fulfilled by a Member as its contribution towards SGF. Clearing Corporation shall be entitled to impose such margin whenever it is of the view that the volatility of rates in the market is at a higher than the normal level. The Members shall be notified by Clearing Corporation prior to the collection and/or maintenance of Volatility Margin. Members shall have the obligation to immediately meet any shortfall in margin arising out of imposition of volatility margin. ii) In case of high volatility in the market, Clearing Corporation shall also be entitled to collect MTM margin on intra-day basis from the Members on their trades already accepted for settlement based on a process as notified by Clearing Corporation from time to time. 4. Concentration Margin Concentration margin is that margin obligation required to be made by a Member in relation to its outstanding exposures in any particular benchmark and/or tenor or for a number of such benchmarks and tenors, beyond pre-determined limit(s) set by Clearing Corporation. 29

30 Clearing Corporation shall have the right to stipulate such margin from any future date after due notification to its Members. C) SUSPENSION ON FAILURE TO PAY MARGIN Notwithstanding anything contained elsewhere in these Regulations: - 1) If a Member fails to comply with the margin call as stipulated under Chapter VI (A) of these regulations, Clearing Corporation shall be entitled to temporarily suspend the Membership rights of such a Member to the Rupee Derivatives (Guaranteed Settlement) Segment or to restrict the access rights of the Member to the Rupee Derivatives Dealing System including effecting a shift to access on Risk Reduction Mode and/or to collection of margins based on orders without providing any offset between buy and sale. In Risk Reduction Mode, Clearing Corporation may accept for clearing only such trades as will have the effect of reducing exposure of Clearing Corporation on the member and / or may advise ClearCorp to admit for trading on the trading system only such orders which, if traded, will have the effect of reducing exposure of the Clearing Corporati on; 2) If a Member fails to fulfill its margin obligations before the time notified for the purpose, Clearing Corporation shall advise Clearcorp to suspend the rights of the Member from trading on the Rupee Derivatives Dealing System. The trading rights shall be restored on the Member meeting the margin obligation to the satisfaction of Clearing Corporation; 3) A Member shall be liable to pay penalty on the Margin shortfall, for the period of delay in fulfilling its margin obligations, as per the rates specified by Clearing Corporation. Clearing Corporation may after due notification, vary the rate of penalty applicable for a Margin shortfall. While computing penalty, only business day may be reckoned provided such penalty and margin shortfall is replenished by the defaulting Member on the next business day. However, in the event of failure by a Member to honour its obligation on the next business day, as above, the actual number of days including intervening holidays, Sunday and non - business days shall be reckoned for calculation of penalty amount. 30

31 4) The Membership of a Member who has been subjected to temporary suspension due to non-fulfillment of margin obligation shall come up for review after the margin shortfall is met or the available margin in the account becomes adequate to cover the Member s margin obligation in this segment. Clearing Corporatio n may reinstate a suspended Member upon a review of its action in fulfillment of its Margin obligations and interest/other charges due to Clearing Corporation. D) CRYSTALLIZED SETTLEMENT OBLIGATIONS: 1. For an outstanding trade of a Member, the amount determined as payable or receivable by the Member either in relation to periodic cash flow exchange and/or due to early termination is termed as Crystallized Settlement Obligation. 2. All Crystallized Settlement Obligations on account of the trades of a Memb er are sub divided into the following two groups: a) amount due for settlement on the current business day and; (b) amount due for settlement arising on account of early termination of trades on any subsequent business day. 3. Discounted value of any net receivable amount by a Member on account of settlement dates subsequent to the current business day shall be reckoned as equivalent to additional margin deposit by the Member. 4. If the settlement for the day is not over till the processing for MTM margin calculation for the day, amounts payable by the members on account of their settlement obligations of the day together with possible interest costs in case of default, are transferred from MTM margin collected from such Members to their Crystallized Settlement Obligation Account. In case the MTM Margin collected from any Member is not sufficient to allow such transfer, the amount may be collected as additional margin from such Member at this stage. 5. After the day s settlement is over, Crystallized Settlement Obligation of the Members for the current business day, if any, shall be released. In the event of settlement shortage in the account of any Member, such amount shall however be transferred to Margin Held Back for Default account. 31